China’s ESG Reporting Standards for Businesses: A New Era of Sustainable Disclosure
China is taking significant strides towards standardizing Environmental, Social, and Governance (ESG) reporting for businesses. These efforts signal a commitment to sustainable development and increased transparency in corporate practices. This article delves into the key aspects of China’s ESG reporting standards and what they mean for businesses operating in the region.
Background
In 2024, China’s Ministry of Finance and nine other ministries and commissions have jointly issued the Guidelines on Issuing the Corporate Sustainability Disclosure Standards—Basic Standards (for Trial Implementation) (hereinafter referred to as the “Guideline”).
These Guidelines make a significant step in aligning with global ESG standards. These standards aim to provide a unified framework for companies to report on their environmental and social impact, as well as their governance practices, and offer a structured approach for businesses to disclose information related to sustainable development.
Key Components
The scope of sustainability disclosures encompasses a range of topics, including:
Environmental Factors: relating to a company’s impact on the planet, including carbon footprint, waste management, and resource consumption.
Social Factors: dealing with a company’s relationships with its employees, customers, communities, and broader society, including issues like diversity, labor practices, and community engagement.
Governance Factors: pertaining to a company’s internal systems, including its corporate structure, board composition, and ethical standards.
Disclosures of sustainability information must adhere to the “materiality” principle, meaning only material information needs to be disclosed. Sustainability-related information is considered material if “its omission, misstatement, or ambiguity is reasonably expected to influence decision-making.” The materiality assessment should align with that used for financial statements. The draft standards specify that disclosures should be synchronized with the reporting timelines for financial statements, with cross-references and correlations facilitated by an index or textual explanation.
Moreover, sustainability-related information must be presented in a stand-alone sustainability report, written in clear and structured language, and may be disclosed to the public concurrently with a financial statement.
Implications for Businesses
Investor Demand
Today’s investors focus more on ESG factors beyond short-term financials. Firms with strong ESG strategies, such as those reducing carbon footprints, appeal to investors worried about climate risks. Integrating ESG broadens the investor base, brings in extra capital, and lowers the cost of capital due to reduced risk perception.
Regulatory Pressure
Global governments and regulators are pushing for sustainable business. The EU’s SFDR (Sustainable Finance Disclosure Regulation[1]) mandates ESG risk disclosure for financial players, and non-financial firms must report ESG in annual statements. In the US, the SEC is considering stricter ESG rules. Companies can’t ignore ESG; non-compliance leads to fines. Proactive firms gain an edge and build good relations with regulators.
Stakeholder Influence:
Customers, employees, and other stakeholders are more ESG-conscious. Customers prefer products from ESG-friendly firms and may pay more. Employees are drawn to companies with good ESG records. Local communities and NGOs monitor ESG performance. Negative ESG events can harm a brand, while strong ESG practices boost market share by enhancing loyalty and relations.
How ESG Impacts Mergers and Acquisitions
ESG factors have emerged as powerful drivers of change and are now integral to M&A success. Incorporating ESG into due diligence helps uncover hidden risks and can reveal potential liabilities related to environmental pollution, employment disputes, or governance issues. ESG considerations are not just about risk avoidance, they can also drive value creation; companies with strong ESG credentials may have more loyal customer bases, a healthier and more motivated workforce, and better relationships with regulators and local communities.
For further insights into ESG considerations in mergers and acquisitions, you can read this article. ESG Considerations in Mergers and Acquisitions
Feel free to contact us for more information.
References:
The relevant person in charge of the Accounting Department of the Ministry of Finance answered the reporters’ questions on the Guidelines on Issuing the Corporate Sustainability Disclosure Standards—Basic Standards
https://www.gov.cn/zhengce/202412/content_6993363.htm
[1] The SFDR Sustainable Financial Disclosure Regulation is a key financial regulation adopted by the European Union in 2019 to improve transparency in financial markets in the area of environmental, social, and governance (ESG) and to drive capital flows to sustainable economic activities. The Regulation comes into force on March 10, 2021, and is a core component of the EU’s Sustainable Finance Action Plan.
